With Chipotle, Boston Omaha, and Idexx Laboratories already selected as surefire growth stocks for my daughter's portfolio in 2023, I want to look at the four dividend stocks that will round out her core holdings.
Dividend growers Coca-Cola(NYSE: KO), Casey's General Stores (NASDAQ: CASY), Pool (NASDAQ: POOL), and Union Pacific (NYSE: UNP) offer straightforward businesses and impressive historical returns that make them great picks for a new investor's portfolio.
By focusing on seven easily understandable companies that my daughter can see in her everyday life, I hope to highlight the vast number of investable businesses around us.
Let's dig in and see what makes these steady dividend-growth stocks stand out.
1. The Coca-Cola Company
While my daughter probably gets frustrated with how often I say no to getting a Coke, it is undoubtedly her drink of choice for road trip pit stops at Casey's or dinners at Chipotle. Though Coca-Cola will never become a 100-bagger for her, its consistent dividend growth, incremental sales growth, and uncomplicated operations make for a terrific core holding.
Despite its incredibly stable nature, Coca-Cola rallied to outperform the S&P 500 over the last five years on a total return basis, which includes dividends.
KO Total Return Level data by YCharts
Operating in a $160 billion addressable market expected to grow by 4% to 5% annually, Coca-Cola seems destined to increase sales by mid-single digits in perpetuity. Although these slim gains may not feel thrilling, the company's mere 6% volume market share of commercial beverages in developing and emerging markets leaves a robust long-term growth runway.
Considering that these markets account for 80% of the world's population, Coca-Cola's growth story undoubtedly has a few chapters remaining. Highlighting this growth potential, the company saw India grow its sales volume by 80% year over year in the third quarter of 2022.
Trading right at its 10-year average price-to-free cash flow multiple of 27, Coca-Cola is reasonably priced and looks like a perfect stock for my daughter to learn from over time -- reinvesting her dividend yield (currently 2.8%) as she goes.
2. Casey's General Stores
Aside from its Cokes, Casey's pepperoni pizza is my daughter's go-to selection when I ask what we should do for dinner on cooking-free nights. (Well, at least when Chipotle doesn't get her vote.)
Regardless, Casey's simple operations and presence seemingly every few blocks around here in the Midwest make it a great selection to learn about and watch over time. Home to 2,400 pizza shops that sell gas across 16 states, Casey's has grown to become the fifth-largest pizza chain in the United States.
With roughly half its stores in towns of 5,000 people or less, the company often acts as a focal point in most of these small communities. Thanks to these strong ties to its customers, Casey's has built a rewards program that is now 5.8 million members strong -- creating valuable engagement in an otherwise commoditized industry.
Powered by its new stores and various acquisitions (projected to be 345 new locations in 2023), Casey's has outpaced the S&P 500 Index over the last five and 10 years.
Trading at just 10 times operating cash flow, Casey's stock looks reasonably priced. Moreover, the business has a track record of growth and a steadily growing dividend (currently yielding 0.7%) even as the company marches toward the coasts.
3. Pool
Pool is an easy pick for a girl who loves swimming -- tying nicely into my daughter's interests and bringing a high and rising return on invested capital (ROIC) of 39%.
POOL Return on Invested Capital (Annual) data by YCharts
Stocks with strong and improving ROICs tend to generate outsized profitability from debt and equity -- historically outperforming their lower-ranked peers. While this concept may be beyond a seven-year-old, it stacks the odds in her favor as she holds this stock for the next decade.
Pool ranks in the top 10% of the S&P 500 Index when sorted by highest ROIC. What's more, its earnings per share have grown 10-fold in the last decade as the company has grown to become the market share leader in pool supplies.
Generating 60% of its sales from recurring, non-discretionary sources like maintenance and repairs, Pool has not only thrived over the last decade but has positioned itself to succeed regardless of the housing market.
Down over 30% in the last year, Pool's shares now trade at just 18 times earnings -- well below its 10-year average multiple of 30. Pool's combination of discounted price, understandable operations, and quickly growing 1.2% dividend make it a perfect holding for my daughter.
4. Union Pacific
Headquartered near my daughter's hometown and with operations throughout the western two-thirds of the United States, Union Pacific is an outstanding stock to highlight that investable businesses are all around her.
Furthermore, through its balanced combination of three operating segments -- bulk, industrial, and premium -- Union Pacific is beautifully diversified, making it a perfect buy-and-forget-about core holding.
With 6,000 locomotives and 30,000 cars (and many more leased), the company connects with Canada and all six Mexican gateways, providing it with a unique geographic moat.
Best yet, Union Pacific has gradually realized improving operating efficiencies, growing its free cash flow-to-sales ratio from 12% in 2012 to 24% in the last year. Riding these efficiencies, the company has eked past the S&P 500 over the past five and 10 years.
Buoyed by its strong cash generation, Union Pacific lowered its share count by 35% in the last decade. On top of that, its dividend has ballooned 285% over the same time -- providing an incredible cash return to shareholders.
With its price-to-earnings ratio down to 19 (from nearly 30 in 2021), a 2.4% dividend, and the company's crucial importance to the U.S. economy, Union Pacific stock makes a superb core holding for my daughter.
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Josh Kohn-Lindquist has positions in Boston Omaha, Casey's General Stores, Chipotle Mexican Grill, Coca-Cola, Idexx Laboratories, Pool, and Union Pacific. The Motley Fool has positions in and recommends Boston Omaha, Chipotle Mexican Grill, and Union Pacific. The Motley Fool recommends Casey's General Stores and Idexx Laboratories and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
